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Stock Options Among Tax Breaks Democrats Target in Budget Talks

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Photographer: Jacob Kepler/Bloomberg

An attendee views model aircrafts displayed at the Gulfstream Aerospace Corp. booth during the National Business Aviation Association (NBAA) conference in Las Vegas.

Executive stock options, corporate jets and the tax break enjoyed by hedge-fund managers are among the targets for Democratic lawmakers seeking to negotiate a budget deal by next month.

The Democrats’ list of options, obtained by Bloomberg News, sets the stage for a renewed clash with Republicans, who reject proposals to raise revenue as part of an agreement. Democrats say taxes must be on the table as lawmakers seek an annual budget that would replace some of the $1 trillion in automatic spending cuts now in effect.

While congressional aides say the two sides are finding some areas of compromise on spending cuts, such as farm subsidies, the standoff over revenue could be the main obstacle to reaching a deal by lawmakers’ self-imposed Dec. 13 deadline.

“It shouldn’t be difficult for Republicans to agree to put just a few of the most egregious, wasteful loopholes and special-interest carve-outs on the table,” Patty Murray, chairwoman of the Senate Budget Committee and the lead Democratic negotiator, said on Nov. 5.

Democrats have long urged Republicans to agree to scrap at least some of the tax preferences on their list, while Republicans argue that doing so would undermine efforts for a broader tax-code revision.

One proposal to limit the ability of some business owners to avoid payroll taxes by claiming income as business profits would save $12 billion over the next 10 years, according to the Democrats’ estimates. Newt Gingrich and John Edwards benefited from the break, according to tax returns the two filed during their 2012 and 2004 campaigns for the White House.

Carried Interest

In addition to closing what Democrats call the “John Edwards/Newt Gingrich loophole,” the options include carried-interest treatment that allows hedge-fund managers and private-equity advisers to pay a 20 percent tax rate on their income instead of the nation’s top income rate of 39.6 percent. Ending that break would save more than $17 billion over a decade, according to the Democrats.

Limiting corporate deductions for “excessive” executive stock options could save even more -- as much as $50 billion over the same period, the Democrats’ list says.

Curbing a break that lets U.S. companies deduct their expenses when they send their plants overseas would raise $200 million and discourage offshoring of American jobs, the Democrats contend. Ending preferences for corporate jets and subsidies for yachts and vacation homes, combined, would bring in another $19 billion.

Republican Opposition

Representative Paul Ryan, the lead Republican negotiator and chairman of the House Budget Committee, has opposed including any tax measures as part of a budget agreement. The 29-member panel, which met last week, will reconvene on Nov. 13.

A spokesman for Ryan didn’t respond to a request for comment yesterday.

Lawmakers on both sides of the aisle have played down prospects for a broader agreement to slow the growth of the U.S. national debt, which is now at $17 trillion.

They are instead looking at a package of no more than $70 billion to $100 billion to replace the automatic spending cuts, which are unpopular among lawmakers from both parties, for a year or two. Given the more limited nature of such a deal, revenue has no place in it, argue Republicans, who also say Democrats are recycling “loopholes” they’ve unsuccessfully sought to use as bargaining chips in past budget negotiations.

‘Very Hard’

“All these proposals the Democrats are putting out there are things there might be some support for if it were in the context of tax reform,” said Senator John Thune of South Dakota. “It’s going to be very hard for Republicans to vote for tax code-related revenue” as part of a budget conference, said Thune, the Senate’s No. 3 Republican. “Every time you close a loophole you’re raising taxes on somebody.”

Democrats say there must be at least some revenue as part of even a smaller-scale deal to replace the automatic budget cuts, known as sequestration.

“What I want to know from Republicans is which ones they are willing to put on the table to help solve this?” Murray, of Washington, said in an interview.

Another Democrat on the negotiating panel, Sheldon Whitehouse of Rhode Island, said Republicans need to justify their stance against raising revenue.

“Why do they want to cut some of the programs that help regular American families while preserving the ability of hedge-fund billionaires to pay carried-interest tax rates and pay less of a rate than a Rhode Island brick mason pays?” he said.

Romney’s Return

Carried interest is the profits-based compensation that private-equity managers, real estate investors and members of oil and gas partnerships often receive. They get a portion of their clients’ earnings as investment income if the underlying earnings are treated that way.

Republican 2012 presidential nominee Mitt Romney’s tax return, which he released during his campaign, showed he used it to help limit his effective tax rate to 13.9 percent. In 2010, $7.4 million of Romney’s $21.6 million in income was in the form of carried interest, taxed at the capital gains rate, his campaign said.

Democrats also are looking at ending tax deductions U.S. companies take for expenses when they relocate their operations abroad.

“When somebody gets a write-off from moving their plant overseas, that’s the kind of spending in the tax code we ought to stop,” said Senator Debbie Stabenow, a Michigan Democrat on the committee.

Last Increase

Republicans say they already voted for a tax increase, citing a law passed in January that let the top income tax rate rise to 39.6 percent. They also say the revenue collected from ending tax preferences is needed to help pay for lowering income tax rates for everyone as part of a broader tax overhaul.

“They’re pushing every little approach they can” to raise taxes, said Orrin Hatch, a Utah Republican and the top Republican on the tax-writing Senate Finance Committee.

“They would like to snooker Republicans into just doing one part of tax reform,” Hatch said. “We can’t do that because you’re going to need all parts to come up with something that works.”

With an estimated $1 trillion in such revenue at stake, Murray and other Democrats say it isn’t a credible position. “I don’t buy it,” she said.

There is some truth to both arguments, said Roberton Williams, a fellow at the Tax Policy Center in Washington. “It’s a matter of degree rather than black and white,” said Williams, a former Congressional Budget Office staff expert.

‘Easiest Ones’

“If you get rid of some of the loopholes there will be less available to buy down tax rates. But will there still be a lot left? Yes,” he said. “But you’re taking away some of the easiest ones they can agree on.”

Additional preferences identified by Democrats include one that allows many multinational corporations to shield foreign subsidiaries from tax by checking a particular box on their Internal Revenue Service forms. Scrapping the provision would save $80 billion over 10 years.

Another targets companies that set up P.O. Box mailing addresses in overseas locations like the Cayman Islands, often referred to as tax havens. There are 18,000 companies that say their headquarters are in a single five-story building in the Cayman Islands, according to the Democrats’ fact sheet. It would save $7 billion over a decade.

Gingrich, Edwards

During the 2012 presidential campaign Gingrich, a Republican and former House speaker, released a tax return that showed income of about $3 million from Gingrich Productions, which is what is known as an S corporation, according to Tax Notes. He paid himself a salary of about $450,000, with the remainder treated as S corporation net income to him that wasn’t subject to payroll taxes. That cost the government $73,950 in employment taxes, Tax Notes said.

Edwards, who ran for the Democratic vice presidential nomination in 2004, disclosed that his S corporation paid him an annual salary of about $360,000, with more than $5 million per year that escaped payroll taxes.

“Some wealthy business owners knowingly mischaracterize their income as business profits instead of salary to avoid Medicare and Social Security payroll taxes,” the Democrats’ list of options says.

Gingrich didn’t respond to messages left on his phone asking for comment. Edwards also couldn’t be reached through his former campaign scheduler, Matthew Nelson.

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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